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Italy rescues Monte dei Paschi bank

AAP logoAAP 22/12/2016

The Italian government has approved a 20 billion euro ($A29 billion) rescue package for Monte dei Paschi di Siena (MPS) bank which is expected to lead to the bank's de-facto nationalisation.

Prime Minister Paolo Gentiloni spoke after chairing an emergency cabinet meeting on Thursday saying the government's aim is to ensure "the widest possible" protection of citizens' savings and make the Italian banking sector "stronger and more solid".

The meeting was called late on Thursday after the MPS said it could not comply with a European Central Bank (ECB) order to recapitalise with five billion euros by December 31. The request was issued after the Italian lender came bottom in recent European banking stress tests.

In a statement issued by its board, the Tuscan lender said its four-day attempt to raise the five billion euros "did not end successfully", adding the bank was going through a "delicate moment."

On the Milan stock exchange, MPS shares fell by 7.5 per cent to just over 15 euros, a near-record low. Market regulator Consob said trading in them would be suspended on Friday.

The bank gave a strong hint about the looming failure of its plans late on Wednesday, saying it had collected less than 2.5 billion euros through debt-equity swaps, and no major investor had offered to buy new shares.

The government said that in accordance with European Union rules which seek to place some of the burden of bank rescues on private investors, holders of MPS subordinated bonds will be forced to swap them for shares.

But retail investors will not lose out, Economy Minister Pier Carlo Padoan pledged.

"There is complete protection for retail savers," he said.

There was concern that up to 40,000 households who bought MPS bonds, often without being informed about the financial risk, could lose lifetime savings. Such an outcome, with elections expected next year, would have been a political disaster for the government.

Once MPS formally asked for help, it could secure state guarantees for its new debt issuances, solving its liquidity crisis, and would be liable for a government-funded recapitalisation, Padoan said, adding that other troubled Italian banks could receive similar help.

The Economy Ministry, already owner of a 4-per-cent stake in MPS, was in line to become its leading shareholder. The government said the bank would need to draft a new restructuring plan to be submitted to the ECB as part of public rescue proceedings.

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